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Working the Gray Areas in China

“If I were to wait until the Chinese government said I could do something, I’d never be able to make money.”

This is a line I have heard on many occasions from different Chinese entrepreneurs.

In China, there are many areas which are not strictly illegal, but they’re not legal either. Most of the time, these involve fields which are too new for the government to regulate. Any government is a slow-moving giant; they are not renowned for their quickness and being smart. In this business ecosystem, the advantage lies with the fast-moving entrepreneur who can identify a need and move in quickly.

By the time the government has figured out the industry and begins to regulate it, the major players are already established. This is how the online gaming industry started in China with Shanda, and how Giant Interactive became successful with its pay-for-play online gaming model.

When Americans and Europeans go to China, they go out of their way to make sure that every “i” is dotted and every “t” is crossed in all their legal arrangements with the Chinese government. Each executive is effectively protecting himself from litigation and any bad news from the Chinese government.

This is like going to church and asking the priest if you will get eternal salvation by going to church every Sunday and donating one million dollars every year.

In doing so, they are basically asking for Chinese government regulation. Now, do you think the Chinese government is going to favor a foreign competitor or local Chinese company, even one which pushed the boundaries of government regulation in China?

This is one of the great ironies in China.

It’s a little like being a parent; who do you love more, the loyal son who does everything you say but is not creative and imaginative, or the smart son who sometimes frustrates you by coming home late, but is brimming with all kinds of insights and creative ideas and dates all the smart beautiful girls?

If you asked the Chinese government, or at least watch what they do on the policy level, they like the smart and sometimes naughty son.

Unless he gets too smart for his own good, in which case they smack him down.

3 Responses to “Working the Gray Areas in China”

  1. frank says:

    good article and i find it hard not to agree with it. One of the skills that I feel that good entrepreneurs have is an ability to sort of sense which rules they can bend and which they should stay adhere to. As one of my friends told me about learning in college. “its not about learning as much as you can….its about learning what you can ignore.”

    i like your metaphor of the prodigal son. Here are some more hackneyed metaphors which seem apt as well.

    better to beg for forgiveness than to ask for permission or better to die like a lion than to live like a sheep.

  2. Will says:

    This is not a uniquely Chinese phenomenon. Regulation is a reactive phenomenon in pretty much all markets. An industry or technology emerges. Its consequences are hard to foresee at first. Over time, as those consequences are discovered, regulation emerges to manage them.

    The main differences here, it seems to me, are twofold. First, that China’s emergence has led to this process unfolding at dramatic speed over the past two decades. Second, that China’s opaque regulatory apparatus, combined with the government’s explicit power over over business, can make the process seem quite arbitrary and dangerous. (Matters here often being settled by fiat rather than tested in court as they would be in the US.)

    But Chinese entrepreneurs aren’t doing anything differently from entrepreneurs in new industries elsewhere in terms of exploiting opportunities and risking that their models would survive the emergence of regulation. The American tech industry provides parallels. Napster was an entrepreneurial test case. The difference is that its fate was settled through commercial litigation rather than government intervention. Similarly, YouTube and the American video sharing sites are still learning what they can get away with.

  3. corbett says:

    There’s another way of looking at this.

    Do you stand to lose your own money, or someone else’s?
    In my experience, you cross more t’s and dot more i’s when your ass is on the line with someone else’s money. When it’s your own, you have more freedom to play in the gray areas.

    BTW, Paul, which son are you?